Friday, April 29, 2011

"Decline of Manufacturing" is Global Phenomenon: And Yet the World Is Much Better Off Because of It

The chart above shows manufacturing output as a share of GDP, for both the world and the U.S., using United Nations data for GDP and its components at current prices in U.S. dollars from 1970 to 2009. We hear all the time from Donald Trump and others about the "decline of U.S. manufacturing," about how nothing is made here any more, and how everything that used to be made here is now made in China, etc. An underlying assumption here is that if the manufacturing base is shrinking in the U.S., there is an offsetting manufacturing gain that is captured elsewhere in the world. In reality, the decline in U.S. manufacturing as share of GDP is a really a global phenomenon as the entire world becomes increasingly a services-intensive economy.

As a share of GDP, manufacturing has declined in most countries since the 1970s. A few examples: Australia's manufacturing/GDP ratio went from 21.3% in 1970 to 9% in 2009, Brazil's ratio went from 24.6% to 13.3%, Canada's from 21.7% to 11.3%, Germany's from 35% to 19%, and Japan's from 35% to 20% (I'll maybe create a chart with a more complete list).

Bottom Line: The complaints about the "decline in U.S. manufacturing" are really a somewhat misguided acknowledgment of the global shift in production that has taken place since we entered the Information Age with the commercial introduction of the microchip in 1971 and gradually left the Machine Age behind. When we complain that "nothing is made here anymore," it's not so much that somebody else is making the stuff we used to make as it is the case that we (and others around the world) just don't need as much "stuff" any more in relation to the overall size of the economy.

The standard of living around the world today, along with global wealth and prosperity, are all much, much higher today with manufacturing representing 16-17% of total world output compared to 1970, when it was almost twice as high at 26.7%. And for that progress, we should applaud, not complain.

> The standard of living around the world today, along with global wealth and prosperity, are all much, much higher today with manufacturing representing 16-17% of total world output compared to 1970, when it was almost twice as high at 26.7%

...And it should decline until it pretty much matches the share of the economy represented by Ag interests.

Been saying it for years myself -- The reason we ain't makin' stuff is because there's no money in it.

The real money is in IP and services.

> Even the environment is much cleaner.

Of course it is -- in order to pay the extra money it takes to make things "cleaner", you have to be rich enough that it's worth your while.

Filth is connected to *poverty*.

As soon as you get wealthy, one way or another, you tend to make things cleaner -- either by paying someone to do the task you don't want to do or devoting some of the time freed by not having to work constantly for basic needs towards cleaning things up that you didn't have time to clean up before.

You could make a similar argument about agriculture as a percent of GDP. Why are we so untroubled about the dramatic decline in agriculture employment? Would we really be better off if more people worked on farms and factories instead of offices and stores?

"People who believe U.S. inflation has been understated, and real GDP growth has been lower or even negative, aren't supported by the real economy."

this argument doesn't make any sense.

first off, the period is wrong. CPI calc was changed in 1992, so comparing it to 1970 is not meaningful.

second, it does not follow that just because inflation was higher and growth lower than reported since 1992 that there was no real growth.

the late 90's were a fairly prosperous time.

the 2000's were not.

in real terms, people were not better off in 2010 than in 1999.

they had run up an incredible amount of debt. starting in the mid 90's (driven by the fact that real interest rates were often negative if you used an accurate inflation metric) household debt exploded.

from 1999 to 2008 it jumped from $5.2tn to 12.5tn.

that alone accounted for around 30% of all cumulative growth (and 6% of all economic activity) in that period.

add in the increase in federal debt over that period (4.4tn) and the number jump to 49& of growth and 10% of economic activity.

takes this out, and all "real" growth is erased if you use a realistic CPI.

people (in aggregate) are not better off now that in 1999.

they may have more stuff, but they also have more debt.

if you doubt that inflation has been higher than reported, than answer me this question:

why have we had nonstop bubbles since the mid 90's?

it's a literally unprecedented series of events to have liked bubbles of this magnitude.

equities drained into real estate drained into bonds is draining into commodities. there has been a bubble somewhere pretty much all the time for 15 years and debt levels have exploded to fund them.

"Could it be that more people live better than ever because we get more money from the government than we did 40 years ago?"...

You mean since there are more people supposedly leeching off the earnings of others (where else does government get money from other than by extorting it from its citizens?) their lives are better now?

Morganovich, you continue to make statements that contradict the data.

Given U.S. living standards are much higher today than in 1980, inflation was grossly overstated after 1980, and after appropriate adjustments to reflect the dynamic economy, inflation was less overstated.

In the 2000s, the U.S. was at full employment after one of the mildest recessions in U.S. history.

I guess, you didn't notice the homebuilding boom, the auto boom, up to $800 billion a year trade deficits, etc., which raised U.S. living standards at one of the fastest rates in U.S. history.

U.S. households went into debt, because the cost of debt was cheap compared to the value of assets and goods.

That's why U.S. household net wealth hit an all-time high in 2007.

Both asset bubbles, in 1995-00 and 2002-07, left U.S. households wealthier even at the post-bubble lows than before the bubbles began.

US household net wealth rises But remains below the record level set in Q3 2007. 15 June 2010

At the end of Q1 2010, the value of US household assets amounted to $68.53 trillion.

At the end of Q1 2010, the level of US total household debt was $13.97 trillion.

US net wealth now represents a very respectable 491% of household disposable income. The current ratio is actually exactly in-line with the long-term ratio, which dates back to 1952, although there have been times when the ratio has risen over 600%.

Overall the US consumer remains extremely wealthy by historical and international standards; despite the high level of debt.

Income for the top 400 richest filers in the USA is skyrocketing, quintupling in constant dollars since 1992. Real income up five-fold for the super-rich!

Hard to imagine they are uninspired to invest their booty. The average tax rate is about 17 percent on this richest--I pay a greater fraction of my income in taxes, and I am not in the top 400. I don't even think I am in the top 500.

The decline in manufacturing and the rise in productivity have are flip sides of the same coin. Those microchips spurred innovation in manufacturing techniques supply chain logistics and back office support thus reducing manufacturing's over all footprint.

Like the U.S., in fact more so, tens of thousand of manufacturing plants have been shuttered in China as they embrace innovation.

As for being better off the debate is on. Yes technology has made thousands wealthy but has it made the worker better off financially?

As pointed out the wealth of the richest Americans has exploded. At the same time working and middle class Americans have seen wages stagnate and in many cases fall.